DBA – Business Administrati on

Ch.13 : Strategies over time

 Ahmed Abd Elmegeid

Omar Hajjaj

Group A Awaleh Farah

Hader Helal

Mohamed Awad [ Presenter]

Agenda
 Game Theory
 Nash Equilibrium
 Business Games & Strategies
 Static Games
 Dynamic Games
• Repeated Game
o Trigger Strategy
o Tit for Tat Strategy
o Implicit vs Explicit Collusion
• Sequential Games
1. Game Theory
• Game theory is a set of tools used by economists and others to analyze strategic decision
making.

• Game theory has many practical applications. It is particularly useful for analyzing how
oligopolistic firms set prices, quantities, and advertising levels.

• Economists also use game theory to analyze bargaining between unions and management
or between the buyer and seller of a car, interactions between polluters and those harmed
by pollution, transactions between the buyers and sellers of homes, negotiations between
parties with different amounts of information (such as between car owners and auto
mechanics), bidding in auctions, and many other economic interactions.

• Game is an interaction between players (such as individuals or firms) in which players use
strategies.

• A strategy is a battle plan that specifies the actions or moves that a player will make

• An action is a single move that a player makes at a specified time within a business game.
Nash Equilibrium

• The idea that players use best responses is the basis for the
Nash equilibrium, a solution concept for games formally
introduced by John Nash (1951).
• The Nash equilibrium is the primary solution concept used by
economists in analyzing games. It allows us to find solutions to
more games than just those with a dominant strategy solution.
• If a game has a dominant strategy solution, then that solution
must also be a Nash equilibrium.
• However, a Nash equilibrium can be found for many games that
do not have dominant strategy solutions.
2.Types of Business Strategy Games.
• There are 2 Types of Games in context of business :-

1. Static Games in which firms make simultaneous

decisions and in which each firm has just a single action
to take, such as producing a particular output level,
charging a particular price, or choosing a particular level
of advertising.

2. Dynamic Games in which firms act at different times. In

this games, players can move either repeatedly or
sequentially.
 3.Static Games

• In a static game, an action and a strategy are identical.

• The static game lasts for only one period, so the action taken
in that period represents the full battle plan or strategy.

• For example, if two firms play a static game in which their

only two possible actions are to set a high price or a low
price, then the firms’ only possible strategies are the same as
the actions: set either a high price or a low price.
 4 Dynamic Games
• In contrast, in Dynamic Games actions and strategies differ.

• If a static game in which the firms choose either a high price or a low
price is played repeatedly period after period, a firm’s strategy
determines its action in each period.

• One possible strategy is for the firm to set the low price in each
period. However, it could use a more complex strategy, such as one in
which its action in a given period depends on its rival’s actions in
previous periods. For example, a firm could set a high price in the
first period and then, in subsequent periods, it could set its price at the
same level that its rival chose in the previous period.
 4.1 Repeated Games.

• In real-world markets, interactions between firms are

often repeated.
• In a single-period (Static) game, each firm must choose
its action before observing the rival’s action.
• Therefore, a firm’s choice cannot be influenced by its
rival’s action. It chooses its best response given what it
expects the rival to do.
• When the same game is played repeatedly, one player
may use a strategy in which its action in the current
period depends his rival’s observed actions in previous
periods.
• For example, in this repeated game each player may use a
strategy where it threatens to punish its rival in later
periods by producing a high level of output if its rival
produces a high level of output in an early period.
4.1.1 Trigger Strategy
• Is a strategy in which a rival’s defection from a collusive outcome triggers a
punishment.
• The trigger strategy is extreme because a single defection calls for a firm to
permanently
• punish its rival by producing the high output in all subsequent periods.
• Less extreme trigger strategies can also be used. For example, a strategy that
involved just two periods of punishment for a defection would still be likely
to make defection unattractive in this example.
• Firms would prefer the cooperative outcome and would probably achieve it in
a game as straightforward as this one. However, such cooperation may not be
possible in real markets because of antitrust and competition laws or because
of limited information.
4.1.2 Tit for Tat Strategy.

• This strategy involves cooperating in the first

round and then copying the rival’s previous action
in each subsequent round.
• Thus, producing high output in one period would
induce punishment (high output by the rival) in the
next.
• The level of punishment in this tit-for-tat strategy
might not be enough to induce cooperation,
depending on how much firms discount future
gains and losses relative to those in the current
period.
• Experiments shows that this strategy has the
highest payoff in repeated games.
 4.1.3 Implicit vs Explicit
Collusion
• In most modern economies, explicit collusion among the firms in an industry is illegal.
• Firms are prohibited from meeting and agreeing to restrict their outputs or to set high
prices. However, antitrust or competition laws do not strictly prohibit choosing the
cooperative (cartel) quantity or price as long as no explicit agreement is reached.
• Thus, if the firms never meet and openly discuss their behavior, they can produce at the
collusive level with little chance of running afoul of the law.
• Firms may be able to engage in such implicit collusion or tacit collusion using trigger,
tit-for-tat, or other similar strategies.
• For example, if one firm lowers its output in the current period in the hopes that other
firms will follow its lead in the next period, it may have stayed within the law as long
as it doesn’t explicitly communicate with the other firms.
• Nonetheless, tacit collusion lowers society’s total surplus just as explicit collusion
does.
4.2 Sequential Games
• Static Cournout games is games in which firms choose output
levels. In that game, firms do not bargain over output levels.
Sequential Games can be studied in context of a repeated Cournot
game.
• More generally, a sequential game can have many stages or
decision points, such as a game where the players alternate moves
indefinitely.
• In other dynamic games,firms move sequentially, with one player
acting before another. By moving first, a firm is able to make a
commitment or credible threat.
• As a consequence, the first mover may receive a higher profit than
if the firms act simultaneously.